On 23 February 2017, the State Revenue Legislation Further Amendment Bill 2017 (Bill) was introduced into the New South Wales Parliament. The Bill amends the Duties Act 1997 (Duties Act), the Land Tax Management Act 1956 (LTM Act), and the Payroll Act 2007.
The Key Duties Act amendments are summarised in below.
Transfer on a change of trustee
Current
Concessional duty where the transfer does not confer an interest in the trust property to a person to the detriment of the actual or potential beneficial interest of any person.
Proposed
'Detriment' deleted and replaced with a requirement that the transfer is not part of a scheme to avoid duty that involves conferring an interest in the trust property to any person so as to cause a person to cease holding an interest in the trust property (ie there is a change in the beneficiaries in connection with the change in trustee).
Aggregation and one arrangement
Current
Duties Act does not list considerations as to when acquisitions form, give effect to or arise from what is substantially one arrangement between the acquirers.
Proposed
Six circumstances to be taken into account in determining whether acquisitions are one arrangement between the acquirers.
Constructive ownership and linked entities
Current
An entity holds a proportionate interest in the property of a linked entity when it is entitled to at least 50% of the linked entity's property either directly or through a chain of linked entities.
Proposed
Constructive ownership of property by private unit trusts and private companies now includes web-linked entities - even if an entity is entitled to an interest of less than 50% through a linked entity or chain of linked entities, the interest is traced through to the entity as a result of all other linked entities or chains of entities being wound up.
Landholdings of a landholder
Current
Landholdings of a private landholder include land transferred to the acquirer (or an associated person) within the 12 month period before the acquisition was made.
Proposed
Provision is extended to include landholdings agreed to be transferred to the person acquiring the interest (or an associated person) within the 12 month period before the acquisition was made.
Specific anti-avoidance – put and call options
Current
The transferor and transferee under an uncompleted agreement for the sale or transfer of land are taken to be separately entitled to the whole of the land.
Proposed
Arrangements that include both a put and call option are to be treated in the same way as uncompleted agreements for landholder duty purposes.
General anti-avoidance provisions
Current
The ‘amount of duty avoided’ is the amount of duty, or additional duty, that would have been payable (or reasonably payable) by the person if the tax avoidance scheme had not been entered into or made.
Proposed
'Amount of duty avoided' is now the amount that would have been payable assuming that a reasonable alternative (ie same economic or commercial result other than avoiding or reducing duty) would have been adopted. The 'do nothing' and 'choice' principles appear to be removed and taxpayers are forced to structure their transactions to maximise the duty payable.
Associated persons
Current
The circumstances where two trustees, for example, are associated persons are examined at the relevant trust level (not requiring an examination of the interests in trusts down-stream).
Proposed
'Associated person' is extended for trustees by tracing through to sub-trusts.
Transfer of property upon change of trustee concession
Currently, a transfer of dutiable trust property as a consequence of the retirement of a trustee or the appointment of a new trustee will be liable to nominal duty only under section 54(3) of the Duties Act if certain criteria are satisfied. One requirement is that the transfer is not part of a scheme for conferring an interest in the trust property on any person to the detriment of the actual or potential beneficial interest of another person.
In CCM Holdings, the Court considered whether the scheme in that case was for the conferral of an interest in the trust property “to the detriment of the beneficial interest or potential beneficial interest of any person”. The Chief Commissioner argued that the term “detriment” meant “a loss of a beneficial interest in trust property”. The Court held that "detriment" may take many forms but that it was not appropriate to describe a transaction as a "loss" when a person receives market value consideration for the trust property at a time of disposal of the interest.
The Bill removes the "no detriment" requirement. It now requires that the transfer must not be part of a scheme to avoid duty that involves conferring an interest, in relation to the dutiable trust property, on a new trustee or any other person (whether or not as a beneficiary) so as to cause any person to cease holding the whole or any part of a beneficial interest (or potential beneficial interest) in that property. The amendments are designed to overcome the decision in CCM Holdings. The result is that various legitimate commercial transactions involving changes in trustees following changes in unitholdings will have difficulty accessing the duty concession. Specifically, it will be necessary for taxpayers to demonstrate that the transfer is not part of a scheme to avoid duty and the transfer is solely undertaken to achieve commercial and administrative outcomes only.
The Bill causes a fundamental policy change by restricting the duty concession on a transfer of property in connection with a change of trustee where there is also a change in the beneficiaries of the trust.
Aggregation and one arrangement
For landholder duty purposes, non-associated persons can be taken to have acquired their interests in a landholder under an “associated transaction” so that their interests are aggregated and together are deemed to have acquired a significant interest in the landholder, giving rise to a liability to landholder duty. An "associated transaction" is one under which the acquisitions form, evidence, give effect to or arise from what is substantially one arrangement between the acquirers (current section 149(1)(a)(iii) of the Duties Act).
The NSW Chief Commissioner has not published a ruling as to his interpretation of current section 149(1)(a)(iii) of the Duties Act . The Bill (which does not appear to change the policy intention of the provisions) now includes the following six factors that are to be taken into account in determining whether acquisitions form, evidence, give effect to or arise from what is substantially one arrangement between the acquirers:
- whether any of the acquisitions are conditional on entry into, or completion of, any of the other acquisitions ;
- whether the parties to any of the acquisitions are the same ;
- whether any party to an acquisition is an associated person of another party to any of the other acquisitions ;
- the period of time over which the acquisitions take place ;
- whether, before or after the acquisitions take place, the interests were, are or will be used together or dependently with one another ; and
- any other relevant circumstances.
Constructive ownership and linked entities
Currently, in determining whether a company or unit trust scheme is a landholder, the entity's land holdings are not limited to land directly held by it but also includes land held by linked entities and discretionary trusts. An entity is a linked entity of the principal entity if a link exists – ie where a person would be entitled to receive not less than 50% of the unencumbered value of the property of another person in the event of a distribution of all property of the person. An entity can be a directly-linked entity or through a chain of linked entities. This is a 'chain' test.
The Bill extends the constructive ownership provisions for private unit trusts and private companies to 'web-linked' entities. In a web structure, even if a company or unit trust scheme is entitled to an interest of less than 50% through any one particular linked entity or chain of linked entities, the value of the property of that linked entity or chain of entities may still be traced through to the private company or private unit trust scheme as a result of all other linked entities or chains of entities being wound up. The web structure operates to calculate the ultimate entitlement the company or unit trust scheme has in the property through a distribution of the property of all linked entities, and not just through one linked entity or chain of entities.
Whilst unclear, it appears the Bill expands the meaning of what is a "landholder" for landholder duty provisions by broadening the constructive ownership provisions.
Inclusion of landholdings agreed to be transferred
Currently, in determining whether a private entity is a landholder, any land holdings transferred to the person acquiring the interest, or an associated person, within 12 months before the acquisition are included in the private entity's landholdings.
The Bill extends this provision by providing that land holdings agreed to be transferred to the person acquiring the interest, or an associated person, within 12 months before the acquisition are included in the private entity's land holdings. The Bill provides for corresponding changes to section 160 of the Duties Act (uncompleted agreements for the sale or transfer of land) to address inconsistency as a result of the amendments.
Put and call options – Same treatment as uncompleted agreements for sale
Currently, the transferor and transferee under an uncompleted agreement for the sale or transfer of land are taken to be separately entitled to the whole of the land (as per section 160 of the Duties Act, referenced immediately above).
The Bill provides that arrangements that include both a put option and a call option (which have the same meanings as in section 106 of the Duties Act) are treated in the same way as uncompleted agreements.
General anti-avoidance provisions
Chapter 11A of the Duties Act was inserted in 2009 and is yet to be interpreted and applied by the courts. Where there is a tax avoidance scheme that is artificial, blatant or contrived in nature, a taxpayer is required to pay an 'amount of duty avoided' by reason of the tax avoidance scheme. This is the duty or additional duty that would have been payable by the person (or is reasonable to expect would have been payable) if the tax avoidance scheme had not been entered into or made.
The Bill states that the amount that it is reasonable to expect would have been payable by the person is determined on the assumption that a reasonable alternative to entering into or making the scheme would have been adopted. The 'reasonable alternative' is one that would have achieved the same economic or commercial result as the scheme, other than the result of avoiding or reducing duty.
The Bill removes the 'choice principle'. This principle provides that a taxpayer can choose the transaction structure (where various commercial structures are available, none of which are artificial, blatant or contrived) which does not result in the maximum duty payable. The result is that taxpayers will not have a choice of legitimate commercial structures. If one structure has a more efficient duty outcome over another then, by choosing that more efficient structure, there is a risk that the general anti-avoidance provisions will apply.
It follows that when given a number of legitimate commercial options, taxpayers must choose the option which results in the higher (or the risk of higher) duty in order to reduce the risk of Chapter 11A applying.
The Bill also casts doubt on the availability of the 'do nothing' principle. When considering a reasonable alternative, there is income tax authority that the particular circumstances may support a “no tax risk” counterfactual (reasonable alternative) in which the conclusion would be drawn that, but for the tax avoidance scheme, the taxpayer would have done nothing because the tax otherwise payable would render a transaction commercially unrealistic.
It is unclear whether the Bill operates to prevent a “no duty risk” counterfactual. The consequence of this for a proposed transaction is that if duty was immediately payable on the transaction, a taxpayer cannot assert that it would not have proceeded with the transaction on the basis that the duty impost would be too high. If this is correct, then the 'do nothing' principle is no longer available, and that a reasonable alternative requires a counterfactual transaction (some positive step taken) in order to calculate the amount of duty avoided.
Associated persons
For transfer duty and landholder duty purposes, trustees are associated persons if any person is a beneficiary common to the trusts of which they are trustees, and a company and a trustee are associated persons if a related body corporate of the company is a beneficiary of the trust (not including a public unit trust scheme) of which the trustee is a trustee.
The Bill amends the definition of associated person to extend the circumstances in which a trustee and another trustee, or natural person, or company are treated as being “associated” with the first trustee by tracing through to sub-trusts. Accordingly, taxpayers will need to undertake complex tracing activities requiring an examination of the relationships of the relevant persons at the head-trust and sub-trust levels. The Bill provides a 'sub-trust' includes a reference to any sub-trust (whether or not a direct sub-trust of that trust) that establishes an interest in the trust, and that a person is considered for the purposes of the associated persons provisions to be a beneficiary of a sub-trust of a trust only if the interest in the trust that is held for the benefit of the beneficiary is an interest of 50% or more.
Transitional provisions
The Bill provides that the proposed Act commences on the date of assent.
Specifically, the Bill provides that in respect of amendments to Chapter 2 of the Duties Act (eg the transfer on a change of trustee provisions), the amendments apply to dutiable transactions that occur on or after the date of assent to the proposed Act. However, an amendment made to Chapter 2 by the proposed Act does not apply to a transfer of dutiable property made in conformity with an agreement for sale or transfer of the dutiable property that was entered into before the commencement of the amendment.
In respect of amendments to the landholder duty provisions, the Bill provides the amendments do not apply to an acquisition in a landholder that is made on or after the commencement of the landholder duty amendment, if the acquisition is made in conformity with an agreement for sale first executed, or with an option granted or otherwise created, before that commencement.
The Bill also provides that an arrangement that includes both a put option and a call option is not to be regarded as an uncompleted agreement for the purposes of section 160 of the Duties Act if the put option and call option were conferred by an agreement or arrangement entered into before the commencement of the new provisions.
Land tax amendment
The key amendment to the LTM Act is the requirement for a Government entity that leases land to disclose to the lessee that the lessee may be liable for land tax in respect of the land. If the Government entity fails to make the required disclosure, and the lessee fails to pay the land tax payable, the unpaid land tax can be recovered from the Government entity and the lessee on a joint and several basis.
